AS 1031: Auditor Responsibilities and Functions

Public company audits are governed by standards from the Public Company Accounting Oversight Board (PCAOB). In 2024, the PCAOB adopted AS 1000, General Responsibilities of the Auditor in Conducting an Audit, a new standard that modernizes the duties of the independent auditor. Effective for audits of fiscal years beginning on or after December 15, 2024, this standard replaces several rules to create a clear, enforceable framework. This unified standard protects investors and maintains the credibility of financial reporting by ensuring audits are conducted with quality and objectivity.

Objective and Function of the Independent Auditor

The primary objective of an independent auditor is to express a professional opinion on a company’s financial statements. This opinion addresses whether the statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. To form this opinion, the auditor performs procedures to obtain sufficient appropriate audit evidence, which must be persuasive rather than conclusive. The final auditor’s report enhances the confidence users can place in the financial statements.

A central concept in auditing is “reasonable assurance,” which is a high, but not absolute, level of assurance. An audit involves professional judgment, testing, and inherent limitations, meaning the auditor does not guarantee that financial statements are completely free from misstatement. Because of these factors, a remote risk always exists that a material misstatement may not be detected.

For example, a home inspector examines a house’s visible systems to give an opinion on its condition but cannot see inside walls or predict all future problems. Similarly, an auditor examines financial records and controls to form an opinion but cannot review every transaction or guarantee future outcomes. The goal is to reduce the risk of an incorrect opinion to an appropriately low level.

Distinguishing Auditor and Management Responsibilities

A clear distinction exists between the duties of management and the independent auditor. The financial statements are the responsibility of management, which includes their preparation and fair presentation in accordance with accounting standards. Management is also accountable for designing and maintaining the company’s internal controls over financial reporting. The auditor’s responsibility is to express an independent opinion on the financial statements that management has produced, which does not relieve management of its duties.

This separation of duties is necessary for audit integrity. If an auditor assumed management’s role, such as making key accounting decisions, their independence would be compromised. The auditor’s function is to evaluate the work of management, not to create it. They assess the accounting principles used, significant estimates made, and the overall financial statement presentation. Users must understand that the auditor’s report is an opinion on the financial statements, but the statements themselves remain the property and responsibility of the company.

Core Principles of Auditor Conduct

Auditors must adhere to several core principles of conduct during an engagement. These principles ensure the quality and reliability of the audit.

• Independence: Auditors must maintain independence in both fact (a state of mind) and appearance (how third parties perceive their objectivity). They must avoid financial, business, or personal relationships with a client that could suggest a conflict of interest. A statement affirming independence is required in the auditor’s report.
• Due Professional Care: This is the standard of a reasonably prudent auditor, requiring diligence and competence in planning and performing the audit and preparing the report. It demands that the auditor performs their duties to the best of their ability, but does not imply infallibility.
• Professional Skepticism: An auditor must maintain a questioning mind and critically assess audit evidence throughout the engagement. This means not accepting management’s explanations at face value without corroboration and remaining alert for conditions that may indicate misstatement. For instance, if management provides a complex justification for a significant transaction, the auditor would seek independent evidence to support its substance.
• Competence and Capabilities: The engagement team must possess adequate technical training and proficiency. This requires a commitment to continuous learning to stay current with changes in regulations and business practices.

Auditor Responsibilities for Detection

Material Misstatements

An auditor must plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. A misstatement is material if it could be expected to influence the economic decisions of users. This judgment depends on the size and nature of the item in its specific circumstances.

The auditor’s responsibility covers material misstatements arising from both error and fraud. While an audit is not designed specifically to detect fraud, the auditor must consider fraud risks and design procedures to respond to them. This involves assessing where financial statements might be vulnerable to manipulation.

Illegal Acts by Clients

The auditor’s responsibility for detecting a client’s illegal acts has specific boundaries. The focus is on illegal acts with a direct and material effect on financial statement amounts, such as tax law violations. For these, the responsibility is the same as for misstatements caused by error or fraud.

For illegal acts with an indirect effect, such as violating environmental laws, the responsibility is more limited. The auditor is only required to perform procedures to identify these acts if specific information comes to their attention. If an auditor becomes aware of a potential illegal act, they must inquire with management and may need to consult the client’s legal counsel.